Mortgage, Home-Equity Woes Linger

May 20, 2014

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Nearly 10 million U.S.
households remain stuck in homes worth less than their mortgage and a similar
number have so little equity they can't meet the expenses of selling a home,
trends that help explain recent sluggishness in the housing recovery.

At the end of the first quarter, some 18.8% of U.S. homeowners
with a mortgage—9.7 million households—were "underwater" on their
mortgage, according to a report scheduled for release Tuesday by real-estate
information site Zillow Inc. While that is an improvement from
19.4% at the end of last year and a peak of 31.4% 2012, those figures
understate the problem.

In addition to the
homeowners who are underwater, roughly 10 million households have 20% or less
equity in their homes, which makes it difficult for them to sell their homes
without dipping into their savings. Most move-up homeowners typically use their
home equity to cover broker fees, closing costs and a down payment for their
next home. Without those funds, many homeowners can't sell.

"It's a sobering
appreciation that negative equity is going to be with us for a while to
come," said Stan Humphries, Zillow's chief economist. "Negative
equity is central to understanding a lot of the distortions in the marketplace
right now."

Those distortions include
the inventory of homes for sale, which, while rising, is low by historical
standards. It also helps explain why first-time home buyers are having such a
hard time cracking the market. Real estate is in some ways like a ladder, Mr.
Humphries notes, so when underwater homeowners don't trade up it makes it
harder for newcomers to get in.

At the same time, prices have
risen about 11% over the past two years, and several times that in rebounding
markets like Las Vegas, Phoenix and much of California. Rising prices, combined
with higher mortgage rates, have given sticker shock to buyers looking for a
deal. This has been particularly hard on first-time home buyers who are usually
in the market for a lower-priced home.

In the report, Zillow
notes that the least expensive homes—those in the lower third of the price
spectrum, which first-time home buyers are most likely to be shopping for—are
much more likely to be underwater than higher-priced homes. Nationwide, about
30% of homes in the bottom third of the price range were underwater in the
first quarter, compared to 18% of homes in the middle third and 11% of homes in
the top third. (Zillow derives its underwater data by matching its database of
estimated home values with loan balances from TransUnion, the credit reporting
agency.)